Monthly Archives: August 2010

One Year After MHR Capital Formalism Can Save (or Cost) Millions

This article was originally published in the New York Law Journal.

By Victor M. Metsch and Thomas H. White

Debt-ridden assets abound, wallets are tight, and creditors guard their contracts with default provisions harder than iron and steel. Yet despite the fortress-like protections around these assets, careful formalism can still save buyers (or cost creditors) millions of dollars in asset-related debt during a purchase. This cautionary message, echoing powerfully in bank accounts and court cases today, was one of several lessons the Court of Appeals taught a year ago in MHR Capital Partners LP v. Presstek Inc., 12 N.Y.3d 640, 884 N.Y.S.2d 211 (2009), a case cited for the ancient formalist rules about an express condition precedent that let a multimillion-dollar asset get away.

Since the Court of Appeals decided the case, it has been cited 16 times, often for the simple idea of reading a contract plainly from the four corners of the document. (The author represented the defendant in the case.) In Fellows v. Citimortgage Inc., __ F.Supp.2d __, 2010 WL 1857243 (S.D.N.Y. 2010), the District Court held in a class action that Robert Fellows was not entitled to cancel his personal mortgage insurance because, reading his mortgage on its face, as required by MHR Capital, he was obligated to make payments on the insurance until either he and the lender agreed that he could stop or termination was required by law. In In re Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y. 2009), the Bankruptcy Court, reading a loan agreement plainly, as required by MHR Capital, held that Metaldyne did not need an objecting lender’s consent to sell its assets.

But the more interesting holding of MHR Capital was that express conditions precedent, denoted in a contract by “if” and “unless” and “until,” must be met not just by substantial performance, but to the letter. The consequences can be extreme. In Franzone v. Elias, 27 Misc.3d 1202(A), 2010 WL 1223930 (Sup. Ct. Kings Co. 2010), Georgette Franzone’s obtaining assignment of a lease within 90 days was an express condition of her settlement agreement in a corporate dissolution action; when she was a few months late to obtain assignment, the decision in MHR Capital precluded her from arguing substantial performance. As a result, the other shareholders were able to appoint themselves officers, terminate Ms. Franzone’s employment, and take over the corporation.

In Van Damme v. Gelber, 24 Misc 3d 1218(A), 2009 WL 2045568 (Sup. Ct. NY Co. 2009) [in which the author’s’ firm represents the defendant and where an appeal is pending], the Supreme Court reasoned under MHR Capital that, in a contract specifying a painting would not be delivered “until” the $2.6 million dollar purchase price was paid in full, the full payment was an express condition, was the only express condition, and failed to condition the purchase on prompt delivery of the funds. The court enforced the sale of the painting.

‘MHR Capital’

MHR Capital was the story of two creditors (MHR, a bond holder, and Key Bank, a credit line provider), two buyers (Presstek and its wholly owned subsidiary Silver Acquisitions Corp.), and a financially distressed debtor, the graphic arts and printing supplier A.B. Dick Company (ABD). Presstek went to buy ABD, promising $10 million in cash and stock to MHR and its partners, if–and watch the if–Key Bank would agree, first, not to foreclose on ABD until the deal went through and, second, to fund ABD as necessary to continue its operations in the meantime. Key Bank’s consent had to be given by means of a carefully negotiated form annexed to an escrow agreement under which the stock purchase agreement between Presstek and MHR was held.

Key Bank refused to sign the consent form, instead sending back amended terms; Presstek immediately terminated its deals with MHR and ABD. ABD declared bankruptcy. A month later, Presstek bought the assets of ABD through a court-ordered “stalking horse” auction–and this time MHR didn’t get anything from Presstek or ABD. MHR argued that Presstek wasn’t a good faith purchaser, but the Bankruptcy Court approved the sale. MHR’s appeal to the District Court was dismissed for procedural reasons, because MHR had failed to seek a stay.

Lessons Learned

There are four lessons to be learned from MHR Capital so far. First, if the Bankruptcy Court overrules objections, seek a stay pending appeal. Second, if you are buying, protect your client from transitional foreclosure, either by express conditions in the contract or by going through the bankruptcy court. Third, if you represent a creditor, it pays to be flexible about financing a deal during a transitional period–failing to extend credit can get you stuck with a problematic bankruptcy claim, rather than letting you own the debt of a reorganized concern under a new corporate master. And fourth, bring all of the creditors and lenders in on the deal before finalizing the negotiation, or at least consider their point of view; a creditor won’t necessarily agree to unlimited funding and, as MHR learned, failing to consider that can cost your client millions.

But we’re not finished. We come back to the “if.” Presstek had initially agreed to buy ABD, but did so conditionally on the purchase agreement being destroyed or returned null and void if Key Bank did not sign the required consent form. Like lions and tigers and bears from the Wizard of Oz, “if” and “unless” and “until” should be the paranoid mantra of the contract world: they denote express conditions precedent, the banes (and saviors) of the contract forest. Key Bank did not sign the requested approval, but substituted its own, which was materially different. Thus, the condition precedent for the deal was not fulfilled.

MHR had forgotten its lions and tigers and bears: it sued in New York for its $10 million, claiming Presstek had improperly terminated the agreement. It spent good money after bad, in the hope of getting out of an express condition precedent.

Unlike implied conditions, express conditions have to be met to the letter: cross the T’s and dot the I’s and if a form has to be signed, have it signed. The legal realists have won in many areas of the law–and with good reason–so usually we can argue a contract was substantially performed and perhaps that our client did things the way they are done in the field. But with express conditions precedent, substantial performance does not suffice; only literal performance of the express condition will do.

Here, Key Bank’s approval, different in several material respects from the consent required under the escrow agreement, was not literal performance. Therefore Presstek’s obligations never came due: because Y never happened, Presstek had no obligation to do X. Without an obligation under the contract on Presstek’s part, MHR had no case for breach of contract.

The Supreme Court, New York County, said MHR was barred procedurally by res judicata and collateral estoppel stemming from the bankruptcy action. MHR appealed and lost again in the Appellate Division, this time on the merits. Then they came to the Court of Appeals. The Court of Appeals did not find the case particularly challenging: Presstek agreed to do X only if Y happened. Y didn’t happen, so Presstek had no obligation to do X.

What lessons can we take from something so simple? First, formalism is still healthy, and that’s not a bad thing in a commercial context because it lets us protect our clients in advance of litigation: one of formalism’s brightest stars is the ex ante protection it lets us give our clients by drafting their documents precisely. Here, Presstek’s express condition saved them from losing a multi-million dollar lawsuit.


In IDT v. Tyco Group, S.A.R.L., 13 N.Y.3d 209, 890 N.Y.S.2d 401 (2009), the Court of Appeals held that under an MHR Capital plain reading, a settlement agreement which contemplated the execution of additional agreements was conditional on their execution. Because the agreements were never executed, much of Tyco’s obligation under the agreement to settle a thirty-million dollar claim never came due.

The last lesson to draw from MHR Capital resonates well with Tyco. That lesson is that express conditions precedent are alive and well. They still teach them in the first year of law school; they still matter in the Court of Appeals; and they can still save (or cost) our clients millions of dollars.

 Victor M. Metsch is a Senior Litigation/ADR Partner at Hartman & Craven LLP